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Thursday, 19 March 1987
Page: 972


Senator HAINES (Leader of the Australian Democrats)(12.45) —The matter that I want to raise today relates to allegations of unsound loans, corruption of loan assessment processes and unfair allocation of project contracts that are being made against the Asian Development Bank from a variety of quarters. I suggest that those allegations should be of concern to Australia, if only because Australia has such a large financial interest in the Manila-based bank. This means, of course, that Australia has a responsibility, I would have thought, to help ensure that the ADB, which is the largest development bank in the Asian- Pacific region, is a sound aid instrument. To do anything else would, I think, be in contravention of the responsibility that governments have to the people of Australia when making these sorts of grants.

Late last year we raised some of these concerns in the Parliament. The Government's response then was that there had been some difficulties in bringing forward ADB projects of uniform high quality but that Australia was working from within the Bank to improve the situation. In view of the coming annual meeting of the Bank's board of governors in Osaka at the end of next month, I would like again to raise the matter of reform of the ADB. At this stage I think I should point out that the Democrats do support the use of government multilateral aid agencies as a mechanism for providing development assistance. Our calls for accountability and, where necessary, reform ought not to be construed, Mr Acting Deputy President, as arguments for the abandonment of multilateral government assistance, but the fact is that the allegations against the Bank are extremely serious and come from several reputable sources. They make it impossible not to question the ability of the Bank at present to aid properly the economic growth and development of Asian and Pacific states-the very states whose need is greatest. The questions that must be answered include what steps are being taken by the Government to ensure that the ADB is an effective and efficient channel for multilateral aid and what steps are being taken to investigate allegations that have been made about the Bank. Answers to these questions would be timely, as I have said, in view of the coming annual general meeting.

For the purpose of putting the concerns into context it might be useful, I think, to give just a brief history of the ADB, which was set up in 1966 to assist the economic growth and development of Asian and Pacific states through the provision of loans, equity investments, technical assistance and policy advice. The major shareholder in the Bank is Japan, followed by the United States of America, China, India and Australia. All in all, there are 47 member countries from the region, from Europe and from North America. Australia has callable shares in the ADB valued at around $US1.1 billion and paid-in capital in excess of $US135m. In this financial year Australia will contribute, the Budget Papers estimate, some $A27.6m to the Bank-a drop of a little more than $A1m from the figure of the previous financial year. That reduction is not of any significant magnitude, certainly nothing to get particularly excited about now. What we do need to recognise is that the Asian Development Bank has had a solid record of achievement since it was set up in 1966, except that in the last two or three years there have been more and more signs that at the Bank all is no longer well. It has been suggested that, as a result of a decline in the availability of suitable projects, the ADB is granting loans to countries for unsound projects; that granting of the loan has apparently become an end in itself.

The decline in worthwhile projects is due, it has been alleged, to some countries in the region now being prosperous enough to do away with, or reduce, borrowing from aid agencies. Meanwhile, poorer countries which still do need substantial funds for development are deterred from borrowing because of high levels of overseas debt. Their economic position has been made especially difficult by the reduced growth rates of the developed world, the growth of protectionist measures by the developed world, and the decline in the terms of trade for the commodity exports of developing countries-leading, of course, to lower export revenues, current account deficits and slower economic growth. In this environment, it has been said the financial aid agencies compete among themselves to maintain their lending levels. In the case of the ADB, it is argued that this had led to a significant number of loans being granted for projects which will not generate sufficient returns to allow the loans to be easily repaid over time. The extent of a country's external debts is thus aggravated and that, of course, does not contribute to its development, long or short term, in any way at all. However, it has been claimed that the self-interest of Asian Development Bank officials is served by the placement of these loans, since they perceive their jobs to be resting on maintaining certain volumes of lending-hardly, I would have thought, Mr Acting Deputy President, a valid reason for granting loans. In fact, concern about loan quality was expressed at the annual general meeting of the board of governors of the Bank in Manila last April. There was criticism of it from the United States of America and I think that we should pay significant heed to a country like the United States when it makes critical comments about such lending practices. The story goes further because it is also claimed that project studies are falsified by ADB officials to enable loans to be approved by the board of directors.

I think that it is worth while to draw on the experience of a former Bank financial analyst, an Australian, Mr Peter Nelson, whose allegations have during the last six months been recorded in the Australian Financial Review, Triple A, an Australian investment magazine, the Sydney Morning Herald, the Wall Street Journal and the Far East Asian Economic Review. His story is corroborated in varying degree by other people, including former Bank employees and unnamed present employees. One of my staff has had some correspondence and an interview with Mr Nelson, and has noted that the evidence which he has put forward to back his claims is quite extensive. In his view, Mr Nelson is not a crackpot. Prior to working for the ADB he worked for the Food and Agriculture Organisation in Africa for four years and is not an innocent when it comes to the workings of international governmental organisations. He is also a qualified economist and accountant and I know for a fact that he has written not only to me, of course, but also to people like the Prime Minister (Mr Hawke) and others about the goings-on at the Bank. I have no idea whether the Government is acting, or is prepared to act in any way at all, on Mr Nelson's claims but I do think that they should be on the record.

The example that I would like to cite in particular relates to the Burma edible oil project. This entails the granting of a concessional loan of $US35m by the Bank for the establishment of an edible oil milling and refining industry organised around government-controlled trading co-operatives. Private farmers are to sell oilseed crops, mostly peanuts, to the co-operatives and the development is taking place in parallel with existing crushing and refining by private mills. Nelson was the financial analyst for the ADB's assessment missions to Burma to determine the strength of the proposal. The first mission took place in September 1984 and the final appraisal report of the project was approved by the board of directors in February 1986. The inception of the loan took place in August of the same year. Nelson says that numerous aspects of the project were suppressed, and figures distorted and invented, so that the project would look accept- able and gain board approval. This is no idle allegation. I would have thought that it was far too serious to be made lightly. These things occurred, despite his analysis and advice, during the appraisal missions and despite his protests as drafts of the report were being prepared.

I have compiled a list, Mr Acting Deputy President, of the sorts of allegations that he says were concealed in the final report and would point out that those items are drawn from his memorandum, submitted at the time of the project assessment, to the President and Vice-President of the Bank. They run to some three pages and, although I have not shown them to the Minister for Finance (Mr Walsh), I would appreciate it if they could be incorporated in Hansard.

Leave granted.

The items read as follows-

Insufficient raw material available to meet project targets;

Unlikelihood of co-operatives being able to raise the projected and necessary capital needed to support loan funds, and ensure that the debt burden on the co-operatives is not excessive (ADB rules require a debt to equity ratio of three to one);

Inappropriate and needlessly expensive equipment recommended for the project.

Co-operatives are supposed to rent out equipment to individual farmers who will then produce the required raw materials. This equipment includes heavy, imported tractors. But they are not practical because the cost necessary to run such imported tractors is high, while there are local tractors available which can be hired at much cheaper rates;

None of the co-operatives has run any large-scale operations and the co-operative which is running the refining and bottling plant has made large losses in years leading up to the project, and carries large debts. Yet the final report says that this co-operative could achieve a financial rate of return of 22 per cent on investment for the period of the loan;

The new mills are to operate over three shifts a day yet current mills only run on one shift. Three, Nelson says, are not possible. Power cuts reduce a working week by at least one day per week and there is not enough fuel for stand-by generators;

When accurate financial rates of return on investment for the period of the loans for each project unit, that is, for each co-operative as a unit, are calculated, there is a zero rate of return. Nelson says that a range of important costs are left out in the analysis in the final report. Further, he says, the co-operatives will not be able to absorb the loan because of lack of capital;

The position is worse as far as a positive economic rate of return is concerned. Nelson says that the price of unrefined, dirty edible oil in Burma was four times the world market for clean oil at the time of appraisal. The project is an inappropriate use of resources from the point of view of aiding the Burmese;

A condition of the project loan is that private sector oil mills should be able to avail themselves of the services provided by two co-operative workshops for the repair and maintenance of equipment and the supply of essential spare parts, as well as the replacement of obsolete extraction equipment. But Nelson says that in his visit to private millers, all of them said that the parts to be supplied under the project were too expensive and they would not use the co-operative workshops;

Procurement of oilseed is to be at prices 20-40 per cent below prices paid by the private sector so that the co-operatives can make oil available to their consumer members at below market prices, according to the final appraisal report of the project (the report that went to the board for approval). Nelson says that the report's statement that there ``is without doubt'' a strong financial incentive for farmers to participate in the government's programs to increase oilseed production does not marry with the fact that the co-operatives will pay so far below market prices. He says that ``the compulsion to sell production or part thereof to the government at below market prices was in part what changed Burma in its rice trade from that of being a major exporter to that of a large importer;''

Nelson says that it could be argued that rather than create a new edible oil industry based on the government-controlled co-operatives, the most efficient and most beneficial action as far as the local people are concerned would be for loans to improve the existing private industry. He says that for the project to work, the Burmese Minister of Co-operatives must force private co-operatives to subscribe money which the people cannot afford.


Senator HAINES —Mr Nelson's protests prior to final approval of the loan by the board led to an in-house inquiry and he records, again in a memorandum to the vice-president of the Bank at the time, 23 April 1986, that he was vindicated by the inquiry. Yet the board was not informed of the findings of the inquiry. It still received a doctored report and the loan was approved and the project begun. Mr Nelson is able to cite other examples of corruption of project analyses, but I think that that particular example should give the Senate a sufficient idea of the claims that are being made against the Bank. Finally, Mr Nelson alleges that strong Japanese influence at senior levels of the Bank's bureaucracy has resulted in Japanese companies being given an unfair advantage in tendering for ADB project contracts. He alleges that Japanese companies often get advance notice of tender specifications. For example, he says that he saw originals of ADB tender documents containing specifications for equipment for a project which included the name of a Japanese manufacturer. This name, he says, was `whited out' in the final document available to companies wishing to tender for the project. Clearly, he says, the specifications drawn up had been those that would be most suitable for the Japanese company. I believe that officers of the Department of Foreign Affairs are aware of this sort of practice on the part of the Bank.

Such allegations should be set, I think, against the Bank's efforts in the last few years to redefine its role in the region. It faces many new demands, some of which might be conflicting. The needs of countries in the region have changed greatly since the 1960s. There is pressure for more attention to be placed on the development of social infrastructure and the impact of development on the environment. Many western governments, especially that of the United States of America, are no longer as enthusiastic in their support for multilateral mechanisms as they were in the 1960s. They question more the extent of their financial contributions and the effectiveness of the agencies. Meanwhile, the poorer developing countries see their economic plight made worse by the growing protectionist policies of wealthy developed countries and the extent to which some of these countries are accumulating surpluses on their external accounts, but not adopting sufficiently expansionary policies internally to increase the volume of their imports. The proceedings of last year's board of governors meeting indicate that Western countries, particularly the United States, are pressing the Bank to place greater emphasis on the stimulation of the private sector in borrowing countries and assisting borrowing countries in market-based economic reforms. They would like to see the ADB shift away from the funding of discrete projects to the placing of greater emphasis on the preparation of individual country strategies and policy advice.

The effect of this policy debate on the Bank is, no doubt, very unsettling and confusing. It is not hard to imagine the uncertainty about the Bank's direction creating a climate that would be conducive to bad lending practices and corruption, but I would not necessarily have thought that that was any justification for what is being done. We believe that Australia has a distinctive role to play in setting a proper course for the Bank. This is by virtue not only of the size of Australia's contribution to the Bank, but also Australia's geographic location and culture. Making sure that the needs of small Pacific states are not overlooked, or not appropriately addressed, by the Bank is a case in point. Australia can act as something of an honest broker between the interests of developing countries in the region and the proposals of the Bank's European and north American members. We therefore look for a clear indication from the Government before the Bank's annual general meeting that it will be pressing for reform and improvements at the Bank.

Sitting suspended from 12.59 to 2 p.m.